Some models of family business in the world are based on the three-circle model of the family business system, which was developed by Renato Tagiuri and John Davis at Harvard Business School in 1978. According to this model, there are three interdependent and overlapping groups that comprise the family business system: family, business, and ownership. As a result of this overlap, there are seven interest groups present, each with its own perspectives, goals, and dynamics. The long-term success of family business systems depends on the functioning and mutual support of each of these groups.
Based on the three-circle model, Tagiuri and Davis identified five models of family business ownership, which are:
- Owner-operated: The owner-operator model is great for family businesses for many reasons. It allows the owner to have full control over the business, to make decisions quickly and efficiently, and to align the business goals with the family values. However, this model also has some challenges, such as succession planning, attracting and retaining talent, and balancing work and family life. An example of an owner-operated family business is Walmart, which was founded by Sam Walton in 1962 and is still controlled by his descendants.
- Partnership: Partnerships work well in the family business set-up. They allow the owners to share the risks and rewards of the business, to leverage the strengths and skills of each partner, and to foster a culture of collaboration and trust. However, partnerships also require clear communication, conflict resolution, and exit strategies. An example of a partnership family business is Berkshire Hathaway, which is led by Warren Buffett and his longtime partner Charlie Munger, who are also related by marriage.
- Distributed: The distributed model is great when it comes to resolving conflicts related to inheritance during the transition. It allows the owners to divide the business into separate entities, each with its own management and governance structures, and to distribute the ownership among the family members. However, this model also involves complex legal and financial issues, as well as potential loss of synergy and identity. An example of a distributed family business is Mars, which is owned by the four children of Forrest Mars Jr., who split the company into four segments: candy, petcare, food, and drinks.
- Nested: The nested model is another ideal family business ownership strategy. It allows the owners to create a holding company that owns and oversees the various businesses, and to allocate the ownership shares among the family members. This model enables the owners to diversify their portfolio, to leverage the resources and expertise of the holding company, and to maintain the family legacy and cohesion. However, this model also requires effective coordination, alignment, and governance among the different businesses. An example of a nested family business is Tata Group, which is owned by the Tata family through a trust, and comprises over 100 companies in various sectors.
- Public: The public model is the most challenging but also the most rewarding family business ownership option. It allows the owners to raise capital from the public market, to access a wider pool of talent and customers, and to enhance the reputation and credibility of the business. However, this model also exposes the owners to greater scrutiny, regulation, and competition, as well as potential loss of control and influence. An example of a public family business is Ford, which was founded by Henry Ford in 1903 and is still controlled by his descendants through a dual-class share structure.ExplainerThe owner-operated model is the most common and traditional form of family business ownership, but it also poses some challenges for the future generation of owners. According to the article by Baron and Lachenauer, only 30% of family businesses survive into the second generation, and only 12% into the third. One of the reasons for this low survival rate is the difficulty of transferring the ownership and leadership to the next generation, especially when there are multiple heirs with different interests and abilities. The article suggests that the owner-operator model can be improved by creating a clear succession plan, developing a family constitution, and establishing a board of directors or advisors.The partnership model is a more collaborative and flexible form of family business ownership, but it also requires a high level of trust and communication among the partners. According to the article by Parada, the partnership model can be seen as a network of relationships that are based on mutual respect, shared values, and common goals. The article argues that the partnership model can be enhanced by creating a family council, a family office, and a family foundation. These structures can help the partners to coordinate their activities, manage their wealth, and support their philanthropic causes.The distributed model is a more complex and diversified form of family business ownership, but it also involves a higher risk of fragmentation and conflict. According to the article by Davis, the distributed model can be seen as a constellation of businesses that are owned by different branches or generations of the family. The article warns that the distributed model can lead to a loss of identity and cohesion, as well as a potential dilution of the family’s influence and control over the businesses. The article recommends that the distributed model can be maintained by creating a family holding company, a family assembly, and a family constitution. These mechanisms can help the owners to preserve their legacy, communicate their vision, and govern their businesses.The nested model is a more sophisticated and integrated form of family business ownership, but it also requires a higher level of coordination and alignment among the businesses. According to the article by Lachenauer and Baron, the nested model can be seen as a portfolio of businesses that are owned and overseen by a family holding company. The article suggests that the nested model can be optimized by creating a strategic plan, a performance dashboard, and a capital allocation process4. These tools can help the owners to evaluate their businesses, monitor their results, and allocate their resources.The public model is the most challenging and rewarding form of family business ownership, but it also exposes the owners to greater scrutiny and competition. According to the article by Parada, the public model can be seen as a hybrid of family and non-family ownership, where the family retains a significant stake and influence in the business, but also shares the ownership with external investors. The article states that the public model can be beneficial for the owners, as it can provide them with access to capital, talent, and markets, as well as enhance their reputation and credibility. However, the article also cautions that the public model can be detrimental for the owners, as it can subject them to more regulation, pressure, and conflict, as well as reduce their control and autonomy.
I believe all models have their own interest and context. We can choose one or mix models for our own family business, depend on our contextual strategies.
